When can a party terminate for late performance?

6 July, 2010

In the recent case of Dominion Corporate Trustees Ltd and others v Debenhams Properties Ltd [2010] EWHC 1193, the High Court considered whether time was of the essence for an obligation to make a payment under a lease agreement. Despite being a property case, the decision is of interest from a commercial perspective because it illustrates the factors that will be taken into account when a court is deciding whether the time for the performance of a contractual obligation is of the essence.

 

It is a common misconception that the use of the words “time is of the essence” in a contract merely indicates that the time for performance of the relevant obligation is important. However, it actually means that even a very minor delay could entitle the other party to terminate the contract and claim damages.

 

Where the parties have not expressly stated that time is of the essence of the contract, the question arises as to when it may be implied, either by the terms of the contract or by the actions of the parties.

 

In this case Dominion owned a shopping centre and had a contract with Debenhams under which Dominion was required pay Debenhams certain sums of money. Dominion was late in paying the second instalment and Debenhams served a notice to terminate the contract claiming that time for payment was of the essence. Dominion disagreed and sued for breach claiming that Debenhams had wrongfully terminated the contract.

 

The contract was silent as to whether time for payment was of the essence and the court was required to consider this issue on the specific facts of the case.  The court found in favour of Dominion and held that although Dominion was late in paying, that did not give Debenhams the automatic right to end the contract. In reaching this decision the court noted that the contract contained a clause which provided for interest on late payments which, the court held, was an indication that the parties had already agreed an express remedy for late payment.

 

This case demonstrates the importance of ensuring that terms are fully agreed in contracts from the outset. The courts will not imply a provision that is not expressly set out in the contract unless there is a clear reason for them to do so.

 

 

Reviewed in 2015